Question 1

Outstanding debt of Home Depot trades with a yield to maturity of 7%.The tax rate of Home Depot is 30%.What is the effective cost of debt of Home Depot?

Accepted Answer

A) 5.2% 
B) 7% 
C) 6.3% 
D) 4.9% 
E) 2.1% 
A) 5.2% 
B) 7% 
C) 6.3% 
D) 4.9% 
E) 2.1%

Question 2

A firm incurs $70,000 in interest expenses each year.If the tax rate of the firm is 20%,what is the effective after-tax interest rate expense for the firm?

Accepted Answer

A) $37,000 
B) $49,000 
C) $56,000 
D) $65,000 
E) $72,000 
A) $37,000 
B) $49,000 
C) $56,000 
D) $65,000 
E) $72,000

Question 3

Anheuser Busch,a manufacturer of beverages,is planning to purchase Six Flags theme parks.Anheuser Busch should use the ________ to evaluate the business of Six Flags.

Accepted Answer

A) WACC of Anheuser Busch 
B) WACC of Six Flags 
C) average market return 
D) cost of debt 
E) cost of equity 
A) WACC of Anheuser Busch 
B) WACC of Six Flags 
C) average market return 
D) cost of debt 
E) cost of equity

Question 4

A firm has $56 million of common stock and $32 million of debt.The cost of equity is 11.4%,and the pretax cost of debt is 5.7%.If the firm's tax rate is 20%,what is the firm's WACC?

Accepted Answer

A) 8.91% 
B) 9.33% 
C) 8.55% 
D) 7.98% 
E) 10.13% 
A) 8.91% 
B) 9.33% 
C) 8.55% 
D) 7.98% 
E) 10.13%

Question 5

Many financial managers use market risk premiums that are closer to 5%,which is lower than historical averages,because investors require a ________ risk premium for holding risky securities than in the past.

Accepted Answer

A) lower 
B) higher 
C) similar 
D) specific 
E) consistent 
A) lower 
B) higher 
C) similar 
D) specific 
E) consistent

Question 6

IBM expects to pay a dividend of $4 next year and expects these dividends to grow at 7% a year.The price of IBM is $90 per share.What is IBM's cost of equity capital?

Accepted Answer

A) 9.65% 
B) 10.23% 
C) 10.89% 
D) 11.44% 
E) 12.36% 
A) 9.65% 
B) 10.23% 
C) 10.89% 
D) 11.44% 
E) 12.36%

Question 7

Your estimate of the market risk premium is 7%.The risk-free rate of return is 4% and General Motors has a beta of 1.5.What is General Motors' cost of equity capital?

Accepted Answer

A) 13.5% 
B) 14.5% 
C) 13.9% 
D) 14.8% 
E) 15.1% 
A) 13.5% 
B) 14.5% 
C) 13.9% 
D) 14.8% 
E) 15.1%

Question 8

Asterix Corp has debt with a book value of $20 million,currently trading at 85% of book value.It also has book value of equity of $30 million,and 2 million shares of common stock trading at $4.75 per share.What weights should Asterix use for debt and equity in calculating its WACC?

Accepted Answer

A) 0.64,0.36 
B) 0.4,0.6 
C) 0.68,0.32 
D) 0.5,0.5 
E) 0.6,0.4 
A) 0.64,0.36 
B) 0.4,0.6 
C) 0.68,0.32 
D) 0.5,0.5 
E) 0.6,0.4

Question 9

When a firm is evaluating the purchase of a business that is unrelated to its current business,it is appropriate to use the current WACC of the firm that is purchasing the business.

Accepted Answer

A) True 
 B)False

Question 10

Verano Inc.has two business divisions-a software product line and a waste water clean-up product line.The software business has a cost of equity capital of 11% and the waste water clean-up business has a cost of equity capital of 6%.Verano has 50% of its revenue from software and the rest from the waste water business.Verano is considering a purchase of another company in the waste water business using equity financing.What is the appropriate cost of capital to evaluate the business?

Accepted Answer

A) 11% 
B) 8.5% 
C) 6% 
D) 9.3% 
E) 7.6% 
A) 11% 
B) 8.5% 
C) 6% 
D) 9.3% 
E) 7.6%

Question 11

Preferred stock of Ford Motors pays a dividend of $4 each year and trades at a price of $30.What is the cost of preferred stock capital for Ford?

Accepted Answer

A) 13.3% 
B) 14.5% 
C) 15.5% 
D) 16.2% 
E) 16.5% 
A) 13.3% 
B) 14.5% 
C) 15.5% 
D) 16.2% 
E) 16.5%

Question 12

Which of the three costs-debt,preferred stock,and common equity-is most difficult to estimate?

Accepted Answer

The cost of common equity is most diffic

Question 13

WestJet Airlines is considering purchasing 20 new planes that will save the company $25 million per year in fuel and maintenance costs for the next 10 years.If the cost of the new planes is $200 million dollars and WestJet's WACC is 8.5%,what is the NPV of the project?

Accepted Answer

A) -$200,000 
B) $50 million 
C) $30.4 million 
D) $0 
E) $4.4 million 
A) -$200,000 
B) $50 million 
C) $30.4 million 
D) $0 
E) $4.4 million

Question 14

The relative proportion of debt,equity,and other securities that a firm has outstanding constitute its:

Accepted Answer

A) asset ratio. 
B) current ratio. 
C) capital structure. 
D) value structure. 
E) enterprise value. 
A) asset ratio. 
B) current ratio. 
C) capital structure. 
D) value structure. 
E) enterprise value.

Question 15

A firm incurs $40,000 in interest expenses each year.If the tax rate of the firm is 40%,what is the effective after-tax interest rate expense for the firm?

Accepted Answer

A) $22,000 
B) $24,000 
C) $27,000 
D) $29,000 
E) $33,000 
A) $22,000 
B) $24,000 
C) $27,000 
D) $29,000 
E) $33,000

Question 16

The outstanding debt of Berstin Corp.has eight years to maturity,a current yield of 8%,and a price of $95.Assume the debt has a face value of $100.What is the pretax cost of debt if the tax rate is 30%?

Accepted Answer

A) 5.6% 
B) 6.5% 
C) 8.5% 
D) 7.2% 
E) 7.9% 
A) 5.6% 
B) 6.5% 
C) 8.5% 
D) 7.2% 
E) 7.9%

Question 17

A firm has a pre-tax cost of debt of 8.5%.If the firm has a marginal tax rate of 40%,what is its effective cost of debt?

Accepted Answer

A) 5.1% 
B) 3.4% 
C) 8.5% 
D) 8.1% 
E) 7.2% 
A) 5.1% 
B) 3.4% 
C) 8.5% 
D) 8.1% 
E) 7.2%

Question 18

A levered firm is one that has ________ outstanding.

Accepted Answer

A) debt 
B) equity 
C) preferred stock 
D) equity options 
E) accounts receivable 
A) debt 
B) equity 
C) preferred stock 
D) equity options 
E) accounts receivable

Question 19

Assume JUP has debt with a book value of $20 million,trading at 120% of par value.The bonds have a yield to maturity of 6%.The firm has book equity of $20 million,and 2 million shares trading at $18 per share.The firm's cost of equity is 12%.What is JUP's WACC if the firm's marginal tax rate is 35%?

Accepted Answer

A) 9.60% 
B) 8.76% 
C) 9.00% 
D) 6.24% 
E) 7.34% 
A) 9.60% 
B) 8.76% 
C) 9.00% 
D) 6.24% 
E) 7.34%

Question 20

What is the assumption about risk when using WACC to evaluate a project?

Accepted Answer

Using WACC in evaluating a fir

Exam 12: Determining the Cost of Capital

Outstanding debt of Home Depot trades with a yield to maturity of 7%.The tax rate of Home Depot is 30%.What is the effective cost of debt of Home Depot?

A firm incurs $70,000 in interest expenses each year.If the tax rate of the firm is 20%,what is the effective after-tax interest rate expense for the firm?

Anheuser Busch,a manufacturer of beverages,is planning to purchase Six Flags theme parks.Anheuser Busch should use the ________ to evaluate the business of Six Flags.

A firm has $56 million of common stock and $32 million of debt.The cost of equity is 11.4%,and the pretax cost of debt is 5.7%.If the firm's tax rate is 20%,what is the firm's WACC?

Many financial managers use market risk premiums that are closer to 5%,which is lower than historical averages,because investors require a ________ risk premium for holding risky securities than in the past.

IBM expects to pay a dividend of $4 next year and expects these dividends to grow at 7% a year.The price of IBM is $90 per share.What is IBM's cost of equity capital?

Your estimate of the market risk premium is 7%.The risk-free rate of return is 4% and General Motors has a beta of 1.5.What is General Motors' cost of equity capital?

Asterix Corp has debt with a book value of $20 million,currently trading at 85% of book value.It also has book value of equity of $30 million,and 2 million shares of common stock trading at $4.75 per share.What weights should Asterix use for debt and equity in calculating its WACC?

When a firm is evaluating the purchase of a business that is unrelated to its current business,it is appropriate to use the current WACC of the firm that is purchasing the business.

Preferred stock of Ford Motors pays a dividend of $4 each year and trades at a price of $30.What is the cost of preferred stock capital for Ford?

Which of the three costs-debt,preferred stock,and common equity-is most difficult to estimate?

WestJet Airlines is considering purchasing 20 new planes that will save the company $25 million per year in fuel and maintenance costs for the next 10 years.If the cost of the new planes is $200 million dollars and WestJet's WACC is 8.5%,what is the NPV of the project?

The relative proportion of debt,equity,and other securities that a firm has outstanding constitute its:

A firm incurs $40,000 in interest expenses each year.If the tax rate of the firm is 40%,what is the effective after-tax interest rate expense for the firm?

The outstanding debt of Berstin Corp.has eight years to maturity,a current yield of 8%,and a price of $95.Assume the debt has a face value of $100.What is the pretax cost of debt if the tax rate is 30%?

A firm has a pre-tax cost of debt of 8.5%.If the firm has a marginal tax rate of 40%,what is its effective cost of debt?

A levered firm is one that has ________ outstanding.

What is the assumption about risk when using WACC to evaluate a project?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters